kansas state university department of ag. economics measuring beef demand james mintert, ph.d....

Kansas State University Department of Ag. EconomicsKansas State University Department of Ag. Economics

Measuring Beef Demand

James Mintert, Ph.D.Professor & Extension State Leader

Department of Agricultural EconomicsKansas State University

www.agmanager.info/livestock/marketing

[email protected]


A Picture of A Healthy Industry

U.S. Cattle InventoryJ anuary 1, 1925-1975

50

6070

8090

100110

120130

140

25 30 35 40 45 50 55 60 65 70 75Year

Million

Head

Source: USDA & K-State Research & ExtensionKSU Dept. of Ag Econwww.agmanager.info


U.S. Cattle InventoryJ anuary 1, 1975-2006

50

60

70

80

90

100

110

120

130

140

75 80 85 90 95 00 05Year

Million

Head

Source: USDA & K-State Research & ExtensionKSU Dept. of Ag Econwww.agmanager.info

A Shrinking IndustryResponding to a Lack of Profitability

Current inventory is about 26% Current inventory is about 26% smaller than in 1975smaller than in 1975


Rising Productivity Is Partially Responsible

Dressed Beef Production . Per Cow Per Year .

200

250

300

350

400

450

500

550

600

650

700

50 55 60 65 70 75 80 85 90 95 00 05 10

Year

Po

un

ds

Beef Production Per Cow

30 Year Trend

Source: USDA & K-State Research & Extension .


But Declining Consumer Demand for Beef Was A Key Factor


DD

SS

PP

QQQQEE

PPEE

Beef Market Equilibrium


DD

SS

PP

QQQQEE

PPEE


PP11

demand decline

DD11


Goal of Beef Demand Index

• Provide a simple way of tracking demand changes

• Provide approximate measure of demand shift, compared to base year & recent years

– 1980 used as base year

– Coincides with approximate start of demand decline


How Do We Compute Demand Index?

• Adjust all prices for inflation using an inflation index (Consumer Price Index)

• Need to differentiate between– movement along an existing demand curve & – shifts in demand

• Price changes attributable to changes quantity are simply movement along an existing demand curve


DD

SS

PP

QQQQEE

PPEE


SS11

QQ11

PP11

Movement from PE to P1 is movement along an existing demand curve, i.e., no demand “shift”



• So we first compute an “expected” inflation adjusted beef price

• “Expected” beef price uses price in base year as starting point– Use a measure of how responsive beef prices

are to changes in quantity to calculate “expected” price

– Calculate expected price, if demand was held constant at base year’s level, based upon change in per capita beef quantity available since base year


Beef Demand Index & Price Responsiveness to Supply Shifts

• Price Flexibility provides a measure of percentage price change expected given a 1% supply change

• Price Flexibility used is -1.49

– 1% per capita supply increase expected to yield 1.49% decline in inflation adjusted price

– Actual index values dependent on choice of price flexibility, but pattern of demand largely unchanged (Marsh, 2003)



Beef Demand Index equals

Actual inflation adjusted retail beef price

X 100

Expected inflation adjusted retail beef price


The Index Documents Demand Decline Beef Demand 1980-1998

Annual Retail Choice Beef Demand Index

88 86 8379 76

70 6966 65 62 59 58 56 55 53 51

94

50

0

10

20

30

40

50

60

70

80

90

100

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98Year

Ind

ex V

alu

e

Source: USDA, Dept. of Commerce & K- State Research & Extension Price Deflated By CPI, 1980 =100 for Beef Demand Index

KSU Dept. of Ag. Econ. www.agmanager.info


Beef Demand Decline Was Devastating

• What’s the linkage between retail beef demand & cattle producers?– Retailers demand for wholesale beef is derived

from demand for retail beef products– Packer demand for fed cattle is derived from

demand for wholesale beef products– Feedlot demand for calves & feeder cattle is

derived from demand for fed cattle


Beef Demand Decline Was Devastating

• Who bore brunt of long-term beef demand decline?– Feedlots & beef processors?

• No, margin operators adjusted to demand reductions

– Answer: Cow-calf producers• How?• Lower returns for cow-calf producers

– Labor– Land– Other capital

• Why?– Industry size decisions are made by cow-calf producers



52 54 56 5559

63

50

0

10

20

30

40

50

60

70

80

90

100

98 99 00 01 02 03 04Year

Inde

x V

alue



Index Also Documents Demand Increase1998-2004

Demand in ’04 Was Up About 25% from 1998 Level


What Happened in 2005?1998-2005


52 54 56 5559

63 61

50

0

10

20

30

40

50

60

70

80

90

100

98 99 00 01 02 03 04 05Year

Ind

ex V

alu

e



Beef Demand During All of ’05 Decreased About 4%But Demand in ’05 Was Still Up About 21% from 1998 Level


Demand Improved Steadily from ’98 through ’04Downward Blip in ’02 Following 9/11

Annual Retail Choice Beef Demand Index% Change From Prior Year

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Year

% C

ha

ng

e F

rom

Pri

or

Ye

ar

.

Source: USDA, Dept. of Commerce & K-State Ag. Econ.


Downturn Got Underway in mid-2005

Quarterly Retail Choice Beef Demand Index% Change From Prior Year

-15%

-10%

-5%

0%

5%

10%

15%

98.1 99.1 00.1 01.1 02.1 03.1 04.1 05.1 06.1Year & Quarter

% C

ha

ng

e fro

m P

rio

r Y

ea

r

Source: USDA, Dept. of Commerce, & K-State Ag. Econ.


Beef Demand ShiftersWhat’s been taking place recently?

Demand index does not indicate why shifts occur

• Possible reasons for recent downturn

– Low carb diet effect has worn off

– Larger chicken supplies

– Consumer’s disposable income growth slowing

• Expect more domestic demand weakness

• How do we turn this around?


What About The Impact of International Trade?


Net Exports of U.S. Cattle, Beef, & By-Products1979-2005

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

79 81 83 85 87 89 91 93 95 97 99 01 03 05

Year

Bil

lio

n $

Source: U.S. Dept. of Commerce & LMIC Net Exports = Exports - Imports

U.S. Was A Net Exporter From 1981-2003


Top 5 Importers Accounted for 91% of U.S. Exports

Top 10 Importers of U.S. BeefRanked by Value of Imports in 2003

Other Category Consists of All Other Destinations

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

Japan Mexico S. Korea Canada HongKong

Taiwan Russia China Kuwait Egypt Other

Destination

Va

lue

(T

ho

us

an

d $

)

.

.

Source: USDA-FAS .

U.S. needs to U.S. needs to recapture these recapture these markets to regain markets to regain $’s and volume$’s and volume


Beef Imports From Canada Decline

Annual Beef Imports From Canada .

0.0

0.2

0.4

0.6

0.8

1.0

1.2

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Year

Billio

n P

ou

nd

s .

Source: USDA & LMIC, 2006 Projected


Result: U.S. Imports Falling Below 2005’s

Annual U.S. Beef Imports

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Year

Bil

lio

n L

bs.

Source: USDA & LMIC, 2006-2008 Forecasts


Long, Slow Road to Export Recovery

Annual U.S. Beef Exports

0.0

0.5

1.0

1.5

2.0

2.5

3.0

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Year

Bil

lio

n L

bs.



Export Recovery Means Net Beef Imports in 2007 Could Be 1/2 2004’s

Annual U.S. Net Beef Imports

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Year

Bil

lio

n L

bs.



Are Retail Demand Changes Reflected At Farm Level?

• 1% increase in beef demand index increases

– Slaughter cattle price by 0.49%

– Slaughter cattle supply by 0.17%

– Feeder cattle price by 0.12%

– Feeder cattle supply by 0.34%

Source: Marsh, American Journal of Ag. Econ., 2003


Are Retail Demand Changes Reflected At Farm Level?

Beef Demand Increased about 6% from 1998 – 2000

– Boosted consumer spending on beef by $2.16 billion

• Estimated producer share about 42%

• Estimated processor & retailer share about 58%

Source: Marsh, American Journal of Ag. Econ., 2003


Do Farm Level Demand Changes Mirror Retail Demand Shifts?

• Spread between retail and farm level prices is variable

• Variability attributable to variety of factors

– Volume

– Capacity utilization


Margin Shifts Can Mask Impact of Retail Demand ShiftsFarm-To-Retail Marketing Margin

Monthly, Inflation Adjusted

50

60

70

80

90

100

110

120

Jan-80

Jan-82

Jan-84

Jan-86

Jan-88

Jan-90

Jan-92

Jan-94

Jan-96

Jan-98

Jan-00

Jan-02

Jan-04

Jan-06

Year & Month

Ce

nts

pe

r L

b.

(Re

tail

We

igh

t)

Source: USDA, Dept. of Commerce, K-State Ag. Econ.


Retail vs. Farm Level DemandPolicy Implications

• Retail beef demand is primary demand

• Demand for fed & feeder cattle derived from retail beef demand

• Retail beef demand shifts are felt at farm level

• In short run other factors, primarily margin variation, can mask impact of retail beef demand shifts

• In long run, consumer demand is paramount


Index Concerns

• Quality of retail price data

– Relying on Bureau of Labor Statistics prices

– Prices are not volume weighted

– Omits all of HRI trade


Improving The Index

Develop Index using scanner based retail price data– Included in Mandatory Price Reporting legislation

– Scanner based prices are volume weighted

– Better measure of what consumers pay

– But we need • A longer data series

• Research that documents price flexibility with new prices

– Still omits HRI trade

• Longer term is a step in the right direction


Is Another Demand Measure Needed?• What’s the objective?

– Consumer initiative decisions should rely on consumer level demand information

• Demand measures at other marketing levels

– Wholesale

– Farm

• Will be driven in part by margin variation


Is Another Demand Measure Needed?

• Demand Indexes do not explain why demand shifted

– Development of other demand measures will necessitate research/information regarding why demand measures differ

– Differences will focus heavily on margin variation

kansas state university department of ag. economics measuring beef demand james mintert, ph.d....

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